Meaning Of Scrap And Its Accounting Treatment

Meaning Of Scrap
Scrap is a left over or residue after a product has been manufactured. The remnant of material resulting after producing the product is scrap. Thus, the residue of raw material incidentally realized in course of manufacturing goods is called scrap. Low quality raw material or abnormal size of raw material gives scrap material. Faulty or wrong product designing, substandard or unsuitable raw material, abnormal machine operation etc are the main causes of scraps. Thus a correct product design helps check scrap.

The leftovers of the coconut hair oil are fibres and the outer shield. Therefore, the fibres and the outer shield of a coconut are scrap since they have to be sold at a nominal value. A hard and thin outer cover of a tree known as bark, end pieces of timber, sawdust, curly pieces of the surface of timber called shavings are scrap of a timber mill.

Accounting Treatment Of Scrap

Option 1
Nominal sales price realized out of negligible scrap is treated as other income in cost account.

Option 2
A scrap account is opened with the full amount of the scrap of the process or job if such a scrap value is significant. Process account or job account is given credit by the value of scrap. The scrap account is closed by the balance either of profit or loss to the profit or loss account.

Option 3
Net sales value of scrap after deduction of selling and distribution costs is deducted either from the overhead amount or from the material cost. Deduction out of overheads is made to adjust the overhead ratio if scrap is not possible to identify in relation to a process or a job.

Related Topics
Meaning, Types And Accounting Treatment Of Waste
Meaning Of Spoilage And Its Accounting Treatment
Meaning Of Defective Units And Its Control

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